How Credit Policies Affect Operations And Debt Collections
By Dean Kaplan+
This article is part two in a three part series about written credit policies and how they can positively affect in-house debt collections. The first article, A Written Credit Policy Can Lead To Debt Collection Success, discussed the benefits of a written credit policy.
There are many different ways to develop a written credit policy. Typically, a credit policy is developed specific to each individual organization, so a boilerplate approach is not recommended. Credit policies can be long and very detailed, or short and very general. Which approach is adopted depends on the company, its management’s needs, and its debt collections strategy.
The primary purpose of a detailed credit policy is to spell out every possible credit scenario, and provide an appropriate response. On the positive side, this gives employees a vast amount of information, which should make it easier for them to make decisions relating to any credit-related scenario that could come up. In addition, there should be uniformity across the entire organization when any issue arises relating to credit or accounts receivable collections. There will be very little unexplained territory, so consistency should reign supreme. The negative to a very detailed credit policy, however, is that it leaves no room for employees to be creative when dealing with credit problems or debt collection challenges. It also has the potential to create a working environment that is dominated by bureaucracy and rule-following. When this occurs, it can be very stifling and put downward pressure on employee morale.
From a debt collections standpoint, the biggest benefit of having a written credit policy that is adhered to by all departments within the company, is the ability to use the components of the policy to encourage payments and reduce the need for in-house debt collectors to step in. For example, if a customer is not paying his debt, a debt collector can put a credit stop on any future orders or shipments. This is a very powerful tool, because if the customer is counting on receiving future shipments of products or services, and his business will be negatively affected by a pause in the pipeline, this will encourage the customer to make the payment. Also, if the sales department enforces the credit stop, additional pressure will be put on the customer to pay because not only is the customer negatively affected, but the salesman’s commissions may also suffer. The credit policy along with good internal communication between the sales force and the in-house debt collector should encourage customers to stay current on their invoices.
Obviously, when a company develops its credit policy, a balance must be struck between excessive versus not enough details. The most important thing is that the credit policy is helpful for employees in their daily dealings, but not stifling. Some trial and error will probably need to occur once the policy is written and the implementation phase begins.
The content of a written credit policy is specific to each company. Some factors which may affect the content include such things as: the day to day culture of your company, how your company fits into the overall industry in which you compete, your company’s market share goals and your company’s debt collections strategy. For any one company there are many different written credit policies which could be devised and they could all be very effective. In other words, there is no one “correct” credit policy. Likewise, over time, the content of a credit policy will likely change. The world is constantly changing, and so is your business. A credit policy is not static. Adjustments sometimes will be necessary to keep the credit policy current and effective.
The next article in this three part series, Writing A Credit Policy To Assure Debt Collection Success, will go into the actual development of a written credit policy.
The Kaplan Group is a boutique collection agency specializing in large (over $10,000) debt collections due from businesses. Founded in 1991, the company has a stellar reputation (A+ rating with the Better Business Bureau) and is recognized as one of the leading collection agencies for results on large and complex matters.